The issue was that Company Y in Brazil was negotiating a contract with Company X in Dubai but was unclear how a key transportation term in the contract should be defined.
The problem was easily worked out by incorporating INCOTERMS into the international sales contract.
That’s Great, Santiago. But What are INCOTERMs?
INCOTERMS, short for “International Commercial Terms,” are widely used in International commercial transactions. They are a series of three-letter trade terms related to common contractual sales practices.
The INCOTERM rules were designed to make it easy for buyers and sellers located in different parts of the world to understand their obligations with the transportation and insurance of goods at a particular point in the shipping process.
Examples of INCOTERMS
The 13 Incoterms are grouped into four different groups. These four groups are:
- Departure (E)
- Main Carriage Unpaid (F)
- Main Carraige Paid (C), and
- Arrival (D)
Each group’s letter corresponds to the first letter of Incoterm.
Let me give you an example.
Suppose you have a contract with a buyer that calls for the release of goods by the seller to occur at the seller’s location, the Ex Works (EXW) Incoterm would be used. This term states that the buyer is obligated to take over transportation and insurance at the sellers dock.
Alternatively, if the seller were to deliver goods to the buyers dock, including all transportation and insurance, a term from the Arrival group such as DDP would be appropriate. The DDP term stands for Delivered Duty Paid and includes in its definition that the seller will deliver goods to the buyers dock with all transportation, insurance, and duties paid.
Did you notice that DDP represents the most obligations for the seller, whereas EXW represents the least?
Terms such as FOB and CIF can be used only for ocean bound freight. FOB, meaning Free on Board, translates to the shipper (seller) having upheld his/her part of the agreement when the goods pass the ship’s rails at the port of exit. The receiving party (buyer) assumes risk and costs associated with the goods once they pass the ship’s rail in the seller’s home port.
Why You Should Use INCOTERMS
As the examples above show, learning to use INCOTERMS can save you a lot of time when negotiating an international sales agreement and help keep your company out of trouble in the future.
A recent study suggested that most international sales disputes arise out of miscommunication at the contracting stage of an agreement. INCOTERMS work well to clarify terms and obligations so that there are no surprises when the sale is finalized.
The video below provides an excellent overview of how INCOTERMS can benefit your international company:
For more information in INCOTERMS, be sure to also visit the United States export.gov website.
Follow the guidelines above and you’ll be well on your way to using INCOTERMS in your international sales contract.